Trade And Security Issues To Dominate Xi-Trump Meeting

China | Political Risk | Country Risk | Tue Apr 04, 2017

BMI View: Trade and security issues will dominate the agenda when US President Donald Trump hosts Chinese President Xi Jinping on April 6-7. Amid growing protectionism by the US and rising tensions in the Korean Peninsula, we believe that the meeting presents a test to both Trump's geopolitical assertiveness in Asia and Xi's need to be viewed as capable of standing up for China's national interests.

US President Donald Trump will be hosting Chinese President Xi Jinping in Florida on April 6-7, and we believe that this meeting will be closely watched to determine whether Trump's administration will act pragmatically internationally or retain a fiercely ideological bent. During his election campaign, Trump adopted an extremely critical stance towards China, accusing it of unfair trade practices and currency manipulation, and criticising its assertiveness in militarising the South China Sea. In addition, Trump has previously suggested in December 2016 that the US's 'One China' policy could be renegotiated. We therefore expect that trade and security issues will be at the forefront of discussions. However, with the Communist Party of China's five-year congress taking place in H217, we believe that Xi is unlikely to make significant concessions towards the US as he seeks to strengthen his position ahead of the party congress.

Trade: Given the importance of trade to China's export-oriented economy, we expect trade issues to take priority in discussions, particularly given Trump's rhetoric against the US's large trade deficit with China. Trump has long bemoaned the US's USD347bn goods trade deficit (2016 figures) with China, which he sees as the clearest manifestation of 'unfair' Chinese trade practices. Trump blames this (and US corporations) for the loss of millions of manufacturing jobs overseas over the past generation or so. Trump also regards China as a 'currency manipulator' and has vowed to pressure it to make concessions to the US. Against this backdrop, we see an under-appreciated risk that Trump will impose tariffs on key imports from China. The danger is that China will retaliate accordingly, leading to a step-by-step escalation to a bigger trade war which could have ripple effects on other regional economies (see 'Trump Presidency: Three Scenarios For China', January 6).

Manufactured Goods Drive The Deficit

US Trade Deficit (L) And Surplus (R) With China In 2015 (USDbn). Service Data For 2014.

Source: BMI, TradeMap

However, we also sense an opportunity for an announcement of a bilateral investment plan (see 'Assessing The Potential For 'Win-Win' Trump Trade Deals', March 2) and for a timetable on further discussions on trade. A real upside surprise could be the announcement of a bilateral trade and investment treaty roadmap. Indeed, Barack Obama started down this road and Trump favours bilateral deals, which means it could be taken further still.

South China Sea: China has continued with its building programme in the South China Sea despite the ruling by the Hague in July 2016, stating that it has no historical claim on the islets (see 'South China Sea Ruling To Raise Regional Tensions', July 13, 2016). Viewing China's actions as a possible threat to the US's freedom of navigation in the area, Trump's foreign policy team has taken an increasingly critical stance towards China's militarisation of the South China Sea, through which a high proportion of East-West trade passes. This would further aggravate existing tensions, leading to the possibility of limited skirmishes among the disputed islets and in the area (see 'Sino-US Geopolitical Competition To Intensify In 2015-2020', March 23, 2015).

A Volatile Neighbourhood

Asia - Geopolitical Alignments

Source: BMI

North Korea: The Korean Peninsula is emerging as a key flashpoint for Trump, as the North presses ahead with its nuclear and missile programmes (see 'US And Allies Largely Powerless To Stop Pyongyang's Nuclear Development', September 9, 2016). Trump has repeatedly called on China to pressure North Korea into scrapping its nuclear programme, but Beijing has been reluctant to abandon Pyongyang outright, for fear of causing the latter's collapse, which would generate a massive refugee and security crisis affecting north-eastern China. In any case, we believe that China's influence over North Korea is limited.

In response, Trump has suggested that the US would be willing to take action against North Korea's nuclear weapons programme without China if Beijing refuses to cooperate. Trump's comments echoed that of Secretary of State Rex Tillerson, who stated in early March that the US policy of strategic patience with North Korea has ended. Although we do not expect the US to take action against Pyongyang any time soon, the risk of US pre-emptive action will increase, as North Korea makes further progress in developing nuclear-tipped missiles capable of reaching the US (see 'Scenario: US Military Strike On North Korea', March 20). A US attack on North Korea could put Washington onto a collision course with Beijing, which is committed to the North's defence.

Taiwan: Lastly, we believe that China will attempt to obtain an agreement that Trump will acknowledge the US's existing 'One China' policy (i.e. of recognising the People's Republic of China as the sole Chinese government), following indications that Trump would be willing to use Taiwan as a means of pressuring or containing China early this year (see 'Cross-Strait Ties To Face Increasing Challenges', January 18). While Trump later backtracked from comments suggesting that he would re-assess the US's 'One China' policy, Beijing will remain wary of any attempt by Trump to use Taiwan or other geopolitically sensitive flashpoints as a means of pressuring it on trade issues.